European Economic Advisory Group Advocates
Wide-Ranging Reform of EU Merger Control Process

After a spate of government-backed outbursts of economic nationalism in the attempt to block takeovers of national champions by foreign firms, the EEAG group pleads for artificial obstacles to hostile and cross-border mergers to be eradicated from Europe

Germany ’s E.ON launches a €29 billion bid for Spain’s Endesa, on the heels of a €19 billion hostile bid for Europe’s steelmaker Arcelor by the Anglo-Indian Mittal. Immediately, the Spanish government cries foul while France’s and Luxembourg’s join up in a chorus of patriotic indignation. The European Commission, in turn, feels compelled to warn both Madrid and Paris not to block foreign takeover bids. Undeterred, Italy raises the prospect of toughening its takeover laws while France passes legislation to deter foreign bidders from acquiring “strategic” French companies. These snippets neatly capture the impetus reached by mergers in Europe, the nationalistic reactions they elicit from some European governments, and the spectre of protectionism that is raising its head across Europe, not to mention the competition concerns mergers give rise to.

As the just-released EEAG Report on the European Economy 2006 * points out in a chapter devoted to this topic, Europe is quickly catching up to what used to be a chiefly Anglo-Saxon phenomenon: cross-border mergers alone totalled close to €300 billion last year, with deals including the acquisition by Italy’s Unicredito of Germany’s HVB, France’s Pernod Ricard of UK’s Allied Domecq, France’s Suez of Belgium’s Electrabel, and France Telecom’s of Spain’s Amena. Add to this the buying spree by (mostly British and American) private equity firms of European conglomerates and the trend is unmistakable.

What is behind this frenzy? For one thing, the pressures imposed by globalisation, which prompt firms to improve productivity: mergers are a prime instrument in this process. For another, strong corporate profits and cheap credit make it easier to find the necessary cash to consummate corporate marriages.

Inevitably, mergers raise a host of public policy issues. Foremost among them is the need to keep a watchful eye to ensure that consolidation will not pose a threat to competition: the latter is, after all, a main driver of economic efficiency and productivity growth.

So, on the one hand is the need for boosting competitiveness in an increasingly globalised market, a task in which consolidation plays a significant role, and on the other, the need for insuring that consolidation will not wipe out the necessary amount of competition in the marketplace. Given the strong reaction of some European governments against foreign takeovers of their national champions or of strategic companies, the public policy question is whether ownership really matters, and whether Europe needs either national or European champions.

The authors of the EEAG report are quite clear on this: “Artificial obstacles to hostile and cross-border mergers should be removed in Europe. Cross-border mergers […] may keep in check the increase in domestic concentration.” Further, they emphasise that care must be taken not to promote European champions in such a way that they end up effectively protected from closure. “The political [clout] of the European champions,” they warn, “may imply that the powers of European competition policy,” under its present institutional structure, “are too limited to deal with those cases.”

While a vigorous competition policy is needed, they point out, care must be taken not to enforce low concentration in natural oligopoly industries, where only a limited number of players can survive. Merger control should take into account the need for larger firm sizes and the potential dynamic efficiencies generated by mergers.

The authors consider the 2004 reform of the merger control procedure in the EU, which introduced a new test for effective post-merger competition by increasing the checks and balances for merging parties and the role of economic analysis, “a move in the right direction”. Nevertheless, they see room for improvement regarding guarantees for the parties, quality of analysis and decision-making, and protection against lobbying pressures by national governments and private firms. An administrative panel, independent of prosecutors and investigators, should take the merger decisions, making a public recommendation to the College of Commissioners. Failing this, consideration should be given to the establishment of an independent European Competition Agency similar to the US Federal Trade Commission.

*Report on the European Economy 2006, Chapter 5, by the European Economic Advisory Group at CESifo. EEAG comprises eight renowned economists from eight European countries. Further info at www.cesifo-group.de/eeag